Cross Default - ISDA Provision

In gory detail

1992 ISDA 5(a)(vi) Cross Default. If “Cross Default” is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (view template)

2002 ISDA 5(a)(vi) Cross-Default. If “Cross-Default” is specified in the Schedule as applying to the party, the occurrence or existence of:― (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) where the aggregate principal amount of such agreements or instruments, either alone or together with the amount, if any, referred to in clause (2) below, is not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments before it would otherwise have been due and payable; or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments under such agreements or instruments on the due date for payment (after giving effect to any applicable notice requirement or grace period) in an aggregate amount, either alone or together with the amount, if any, referred to in clause (1) above, of not less than the applicable Threshold Amount; (view template)

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Cross Default in a Nutshell™ _{(1992 ISDA edition)}

Template:Nutshell 1992 ISDA Cross Default

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Cross Default in a Nutshell™ _{(2002 ISDA edition)}

5(a)(vi) Cross-Default. If “Cross-Default” applies to a party, it will be an Event of Default if:

(1) any agreements it (or its Credit Support Providers or Specified Entities) has for Specified Indebtedness become capable of acceleration; or

(2) it (or its Credit Support Providers or Specified Entities) defaults on any payment of Specified Indebtedness (and any grace period expires);

And the total of the principal amounts in (1) and (2) exceeds the Threshold Amount.

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The difference between the two formulations

Measure of the Threshold

• The 1992 Version: This contemplates default in an aggregate amount exceeding the Threshold Amount which would justify early termination of the Specified Indebtedness - that is to say the defaulted payment contributes to the Threshold Amount, not the principal amount of the Specified Indebtedness itself;
• The 2002 Version: This contemplates an event of default under agreements whose “aggregate principal amount” is greater than the Threshold Amount: that is to say it is the whole principal amount of the agreement which is picked up, not just the amount of the payment.

This change, we speculate, is meant to fix a howler of a drafting lapse:

• It can be triggered by any event of default, not just a payment default (I.e. the 1992 wording "an event of default ... in an amount equal to..." impliedly limits the clause to payment defaults only, since other defaults aren't "in an amount"...);
• It captures the whole size of the Specified Indebtedness, not just the value of the defaulted payment (if it even is a payment) itself.

For example: if you defaulted on a (relatively small) interest payment, which made the whole loan repayable, under the 1992 formulation you could only count the value of the missed interest payment to your Threshold Amount. But the risk to you ise whole size of the loan, as that is what could become repayable if the loan is accelerated.

It is innocuous, that is, unless you are cavalier enough to include derivatives or other payments which are not debt-like in your definition of Specified Indebtedness. But if you do that, you've bought yourself a wild old ride anyway.

In case it isn't clear, Cross Default is intended to cover off the unique risks associated with lending money to counterparties who have also borrowed heavily from other people. If you try - as starry-eyed credit officers like to - to apply it to contractual relationships which aren't debtor/creditor in nature, it will give you gyp.

Don't say you weren't warned.

Aggregation of limbs (1) and (2)

The 1992 version doesn't specifically provide that you can aggregate amounts calculated under each limb. Arguably that's implied - but you know what derivatives lawyers are like! DON'T IMPLY ANYTHING. IT MAKES AN IMP OUT OF L AND Y. You get the picture.

Rather uniquely attention-sapping drafting all round.

General

This article is specifically about the Cross Default provision in the ISDA Master Agreement. See: cross default for a general discussion of the concept.

Under the ISDA Master Agreement, if the cross default applies, the occurrence with respect to a party of a payment default under, or other circumstance that could result in the early termination of, Specified Indebtedness above an agreed Threshold will give the other party the right to terminate transactions under the ISDA Master.

Specified Indebtedness is usually defined to any claim against a party (by any third party) for borrowed money (e.g. bank debt; deposits etc.) and the Threshold which triggers it is usually defined as a cash amount or a percentage of shareholder funds.

If the cross default applies, the terms of any Specified Indebtedness owed by the counterparty above the Threshold Amount are, in effect, indirectly incorporated into the ISDA Master Agreement. For example, the breach of a financial covenant in a qualifying loan facility, even if not acted upon by the lender of that facility would give a swap counterparty the right to terminate transactions under the ISDA Master even though the ISDA Master itself contains no financial covenants.

Cross Aggregation

The 2002 ISDA updates the 1992 ISDA cross-default provision so that if the outstanding amount under the 2 limbs of cross-default added together breach the Threshold Amount, then that will trigger cross default. Normally, under the 1992 ISDA , cross-default is only triggered if an amount under one or the other limbs is breached.

As per the above, the two limbs are:

• a default or similar event under financial agreements or instruments that has resulted in indebtedness becoming capable of being accelerated and terminated by a Non-defaulting Party
• a failure to make any payments on their due date under such agreements or instruments after notice or the expiry of a grace period.